Adapting to change

This plan – ‘Unlocking the Global Potential‘ – is based on three strategic objectives:

• To target more of our financial resources on areas that have strong growth prospects.
• To improve growth and returns from our existing businesses.
• To manage AEGON as an international company.

The second half of 2008, however, saw a dramatic decline in world financial markets. This led to a shift in priorities both for us and the global insurance industry. In particular, uncertain economic and market conditions have resulted in an increased demand for capital to support existing businesses, which means fewer resources are now available for international expansion or acquisitions. We believe these conditions will last well into 2009.

The global financial crisis, which took hold in the third quarter of 2008, has left the insurance industry facing a number of important challenges, including:

• A downturn in the world’s leading economies
• Falling corporate bond and equity values
• Lower interest rates
• High volatility in financial markets
• Greater demand among customers for financial guarantees
• A more conservative stance by national industry regulators and international rating agencies.
  

Market conditions and focus

These factors have resulted in an increased need for capital within the insurance industry. At the same time, however, because of growing economic and market volatility, the cost of capital has risen sharply. In response to these extraordinary market conditions, we shifted our focus in the second half of 2008 to the following areas:

• Efforts to lower risk and free up additional capital from our existing businesses.
• Measures to reduce operating expenses in 2009 and ensure a sufficient capital buffer as a safeguard against further declines in world financial markets.
  

Protecting our position

As part of this approach, we accelerated measures already set out in June in our five-year growth plan. These measures are designed to free up a total of EUR 4 billion to EUR 5 billion of capital by 2012 from our existing businesses. In addition, we also took a number of steps aimed at reducing risk and protecting the company’s position during the financial crisis:

• We reduced its exposure to equity markets.
• Our investment portfolio was structured more defensively, interest rate risk was reduced and guarantees lowered.
• We also stepped up our hedging program and matching of assets and liabilities, and substantially increased the resources committed to risk management.
  

Freeing up capital

Taken together, these steps enabled us to free up EUR 1.7 billion in capital from its businesses during the second half of 2008 – capital that helped the company withstand a considerable worsening in market conditions. We expect to free up a further EUR 1.5 billion in capital in 2009. In October 2008, we took the further step of securing EUR 3 billion in additional core capital from Vereniging AEGON, funded by the Dutch State – a necessary precaution against further declines in world financial markets.

Overall, this approach ensured that we would enter 2009 with a significantly reinforced capital buffer, an important safeguard in the current uncertain market environment. At the end of 2008, we had EUR 2.9 billion in capital over and above what would be required to maintain a AA rating for its operating units.

Lower operating costs

In addition, we have also announced that we expect to lower operating expenses in 2009 by more than EUR 150 million, equivalent to approximately 5% of the company’s 2008 cost base. These savings will be achieved through restructuring programs, efficiency improvements and expense reductions at our operations in the United States, the Netherlands and the United Kingdom.